Inflation leaves the RBA no choice (maybe)

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Philip Lowe has managed to put off raising rates as he waits for wage inflation to start to occur which originally he pointed to the end of 2022 at the earliest, and was originally saying inflation was transitory in nature.

However as Australia comes off the back of a 5.1% inflation hike for the last 12 months it might be time to join the other central banks with a raise to cash rates.

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With Australia and the European central bank yet to move it raises the question of what will it take for the RBA to raise rates. Obviously the European Central bank have a few other issues to add to the equation on top of their 7.5%CPI for the 12 month period, but we have seen the rest of the countries make big moves already ready to start bringing inflation under control. (See NZ with 4 rate rises already bringing them up from Zero to 1.5%, Australia is sitting unchanged at 0.1%)

For Australia inflation is coming from housing at 23% for the year, food and drink at 16%, recreation at 13% and transport up 11%, however housing isn’t used in the RBAs figures which them gives a trimmed mean CPI of just over 3% (conveniently just outside target)

However both Coles and Woolworths have revealed inflation across their shelves, with Coles Fresh and Dry up 4.6% and 2.4% respectively, and Woolworths at 4.9% and 3.9%. (Apparently this is because Woolworths caters to more affluent people)

Parliamentary pressure is also on the cards, as the LNP will not want the RBA to increase in May due to the election happening that month, last time the RBA increased rates the month of a federal election John Howard lost to Kevin Rudd (in 2007), however the rate rise and the LNP losing could have just been coincidental.

The RBA have put themselves in a tight spot not moving sooner with small incremental increases to the Cash rate over the past 6 months, this might lead Philip Lowe to having to make a large move (25 basis points) to start to pull back our inflation trajectory. 

I guess we will find out on Tuesday.

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